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What is a Loan Modification?

A mortgage modification is a loss mitigation option that allows a borrower to extend the term of the mortgage loan, reduce the interest rate, reduce the principle balance, and many more options. The goal is to make the payments more affordable for the homeowner. Loan Modification vs. Refinancing.

How many Loan Modifications may a Borrower receive?

A Borrower is limited to one Loan Modification or FHA-HAMP within a 24-month period.

How does a lender determine a borrower’s eligibility for a Loan Modification?

Lenders will use specific financial analysis criteria outlined by HUD when determining a borrower’s eligibility for the Loan Modification Option. These critieria include:

  • The household or mortgagor(s) has experienced a verifiable loss of income or increase in living expenses;
  • One or more mortgagors receives “continuous income” in the form of employment income (e.g., wages, salary, or self-employment earnings), social security, disability, Veterans benefits, child support, survivor benefits, and/or pensions;
  • The mortgagor’s surplus income is at least $300 and is at least 15 percent of his/her net monthly income;
    85 percent of the mortgagor’s surplus income is insufficient to cure arrearages within six months;
  • The mortgagor’s monthly PITI mortgage payment can be reduced by the greater of 10 percent of the original monthly mortgage payment amount and $100, using the Market Rate and amortizing the new loan over 30 years;
  • The mortgagor has successfully completed a 3-month Trial Payment Plan based on the reduced mortgage payment amount or a 4-month Trial Payment Plan in cases of imminent default;
  • The mortgagor has not received a Loan Modification or FHA-HAMP in the previous 24 month period.

When utilizing the Loan Modification option, may the lender include all fees and corporate advances?

Legal fees and related foreclosure costs for work actually completed for the current default episode may be capitalized into the modified principal balance. See ML 2008-21.

May a lender perform an interior inspection of the property if they have concerns about property condition?

The lender may conduct any review it deems necessary to verify that the property has no physical conditions adversely impacting the borrower’s continued ability to support the modified mortgage payment.

May a Lender include late charges in the Loan Modification?

The lender is expected to waive all accrued late fees.

When completing the Loan Modification Option, what interest rate should the lender use?

The lender should modify the interest rate to the current Market Rate, defined as a rate that is no more than 25 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for 30 year fixed-rate conforming mortgages (US average), rounded to the nearest one-eighth of one percent (0.125%), as of the date a Trial Payment Plan is offered to a borrower.

Are Lenders required to re-amortize the total amount due over a 360 month period?

Yes, the Lender must re-amortize the total unpaid amount due over a 360 month period from the due date of the first installment required under the modified mortgage.

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